Despite the STI’s 16.6% rally from 12 Feb 2016 through 21 Apr 2016 closing levels, Sapphire has been a laggard and registered a 13.3% drop. However, over the past two weeks, there seems to be a change in Sapphire’s price movement. Sapphire registered a 9.8% gain vis-à-vis a 6.5% drop in the STI, on the back of the strongest weekly volume (25 – 29 Apr 2016) for the past two months.
Based on Chart 1 below, Sapphire is on the verge of testing a region of strong resistance of around $0.275 – 0.280. 21D and 50D EMA have started to inch upwards and seem to be turning upwards. 100D EMA has stopped declining and turned flat. Volume has picked up for the week of 25 Apr. Although volume has declined for the week of 3 May – 5 May (partly due to one public holiday), it is assuring to see that Sapphire did not drop despite the weak market. Indicators such as RSI and MACD are strengthening. ADX closed at 10 on 5 May 2016, indicative of a lack of trend. It is likely to trade within the range between $0.250 – 0.290. A sustained break with volume expansion at $0.250 / 0.290 points to a measured technical target of around $0.210 / 0.330 respectively. In my opinion, the probability for a bullish breakout outweighs that of a bearish breakdown.
Near term supports: $0.275 / 0.270 / 0.260
Near term resistances: $0.280 / 0.290 / 0.310
Chart 1: Probability of a bullish breakout > bearish breakdown
Source: Shareinvestor as of 5 May 2016
Noteworthy points
1. Ranken sits on an order book of RMB2.0b as of 25 Feb 2016
It is likely that a good portion of this RMB2.0b of order book can be recognised this year, translating to a strong FY16 vs FY15. In FY15, Sapphire only enjoyed one quarter of revenue contribution from Ranken which amounted to SGD61.8m, or approximately RMB283m equivalent. It is noteworthy that 1QFY16 may be weaker than 4QFY15 as there were two weeks of Chinese New Year holidays. Nevertheless, FY16F should be stronger than FY15 due to a full year contribution from Ranken.
2. Update from Mancala, Sapphire’s mining business
Sapphire updated on 6 Jan 2016 that its mining business, Mancala may have a strategic investor. Three months have passed without any update. It is likely that there may be an update on this aspect in the next six months.
3. Valuations seem attractive based simply on two aspects
On 22 Jan 2016, Sapphire announced that Mr Li Xiaobo who is ranked among the Top 400 Forbes China Rich List in 2014, bought 100.8m Sapphire shares at $0.097. Adjusted for 3 to 1 share consolidation, his entry price was $0.291. This, coupled with Sapphire’s NAV / share of S$0.278 seem to imply that current valuations do not seem to be expensive. It is noteworthy that Sapphire operates an asset light business model, thus its valuation of 1x P/BV may not have fully captured the full intrinsic value of Sapphire.
Investment risks
1. Lack of trading volume
This was exacerbated after the share consolidation where every three shares were consolidated to one share. According to Bloomberg dated 3 May 2016, average 30D volume amounted to around 82,000 shares being traded.
2. No rated analyst coverage
There is no rated coverage yet. It is likely that analysts and the investment community may prefer to wait for one or two more quarters to assess whether Sapphire’s results are stable and improving.
3. Possible execution risk
For Ranken, there may be possible execution risks, especially when Ranken has only made one quarter’s contribution to Sapphire. It would be good if Sapphire can report two more quarters of results where we can see the consistency and strength of its results, particularly from Ranken.
Conclusion – price action seems positive
Price action seems positive. However, readers should be aware of the above risks. Readers who wish to know more about Sapphire can refer to my write-up on Sapphire (click here for more information) and their informative website here for more information.
Disclaimer
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